FBAR: Foreign Bank and Financial Accounts Report

What is FBAR?

Each US person who has a financial interest in or signature authority or other comparable authority over any foreign financial accounts (including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, you must report that account to IRS each calendar year.

This reporting is accomplished by filing a form called FBAR, Foreign Bank and Financial Accounts Report, and is due on or before June 30 of the following year. So, you will report your 2011 foreign accounts by filing FBAR before June 30th, 2012, for example.

Rather than giving you all details here, I would like to direct you to the IRS website where you can get up to date information.

Who Needs to File FBAR

United States persons are required to file an FBAR if:

• The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and


• The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

Who is United States Person for Tax Purposes

Short answer is anybody who files Form 1040 (including different schedules) or Form 1040EZ. This encompasses pretty much anybody who files their taxes as 'US Residents' which include all US Citizens, Greencard holders, and Resident Aliens. Please see this definition from IRS website.

If your tax status is "Non-Resident Alien", then you are required to file Form 1040NR or Form 1040NR-EZ, AND therefore you are not subjected to FBAR reporting requirements because you are not taxed at your worldwide income on your taxes.

Common Mistakes by US NRIs

Lots of people confuse their tax filing status with their immigration status. The confusion comes over two similar terms, but they have different meanings to the two separate government agencies.

USCIS uses the term 'non-immigrants' to include all foreigners who temporarily reside in the US. The most common non-immigrant statuses include F-1, F-2, J-1, J-2, H-1B, H4, B1, B2, and TN. Also, USCIS uses the term 'immigrants' or 'permanent residents' to include all people who possess a US Greencard.

IRS classifies US residents in two major groups, US Residents and US Non-Residents for tax filing purposes. US Resident status for tax purposes include all people who are US Citizens OR all foreign nationals who have passed either a Greencard test or Substantial Presence test.

Most people who are on H-1B visa (non-immigrant workers) are classified as US Residents for tax purposes by IRS based on the substantial presence test.  However, people confuse this US Resident status from the IRS with Permanent Resident status from USCIS. This confusion sometimes lead people to believe that they do not need to file FBAR because it only applies to permanent residents (greencard holders) which is not true.

Also, another mistake made by people is not including their worldwide income sources while filing taxes in the US. Many people who come on H-1B visa may have worked in India before coming to the US. They may have investments or financial accounts back in India that may be earning interest or dividends. This incomes must be reported to the IRS because you are taxed on worldwide income and not just your income in the US. Similarly, income earned in NRE/NRO/FCNR accounts need to be reported to IRS. Please note that this obligation is separate from the FBAR reporting obligation. You are required to fulfill both of your obligations, i.e. pay taxes to IRS on your worldwide income by April 15th AND report your foreign financial accounts by June 30th if the aggregate value of those accounts exceeds $10,000. Just fulfilling one obligation doesn't relieve you of the stiff penalties.

Lastly, many people have joint accounts with their family back in India. This constitutes as having 'financial interest' or 'signature authority' over the foreign bank account by the IRS. So, FBAR reporting requirements apply in this situation even though you may not be the primary owner of the account.

FBAR Penalties

The penalties for failure to file an FBAR are severe and are worse than tax penalties. FBAR reporting failure can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation and each year you didn’t file is counted as a separate violation. See here for more information.